After the war, Lavarack returned to Australia, where he took up a post at the Royal Military College, Duntroon. In 1926, he was promoted to brevetcolonel, and in 1927 attended the Imperial Defence College in London. Back in Australia in 1929, he found himself in heavy debate with fellow IDC student Frederick Shedden over the Australian government's adoption of the "Singapore strategy". Shedden believed that the presence of the Royal Navy in Singapore would deter any aggression from Japan, whilst Lavarack was sure that Japan would take advantage of Britain's focus on Europe and that Australian army forces should prepare for a possible invasion.[1][3]

In January 1933, Lavarack was made commandant of the Royal Military College, Duntroon. On 21 April 1935, with a temporary promotion to major general (later made permanent in June), he was appointed Chief of the General Staff (CGS), the head of the Australian Army. As CGS, Lavarack pulled no punches over what he saw as an over-reliance on the Royal Navy and neglect of Australia's land forces—renewing his argument with Shedden, and causing considerable friction with the Australian government, in particular a number of successive ministers for Defence.[1][2]

In 1938, British officer Lieutenant General Ernest Squires was appointed Inspector-General of the Australian Military Forces. Lavarack and Squires worked together to prepare Australia for war, and by the time Lavarack returned from a tour of Britain, the Second World War had begun. With Squires replacing him as CGS, Lavarack was promoted to lieutenant general and made General Officer Commanding Southern Command. In 1940, Lavarack was considered to command 6th Division, but Thomas Blamey, now the commander of I Corps, refused his appointment, citing "defects of character".[1][2] Lavarack instead took command of the newly formed 7th Division, also accepting a demotion to major general which was almost certainly instigated by Blamey.[4]

In 1941, the commander-in-chief in the Middle East, Lord Wavell, ordered Lavarack to Tobruk, where his units were successful in repelling Erwin Rommel's forces. Wavell requested Lavarack take command of the Western Desert Force, but he was once again confounded by Blamey, who insisted that he was unsuitable for high command. After further successes in the Syria-Lebanon Campaign, Lavarack was re-promoted to lieutenant general, and took over Blamey's role as commander of I Corps, with Blamey now deputy commander-in-chief in the Middle East.[1][2]

Following the outbreak of war with Japan, I Corps was shifted to the Far East, arriving in Java in January 1942. Lavarack was recalled to Australia, where he was made acting commander-in-chief of Australian forces whilst waiting for Blamey to return from the Middle East to fill the role. He then commanded the Australian First Army, with responsibility for defending Queensland and New South Wales. In 1944, he flew to the United States where he became head of the Australian Military Mission, and was military advisor for Australia to the United Nations Conference on International Organization. He returned to Australia in August 1946, and frustrated by his lack of active command and constantly being passed over by Blamey and others, he retired from the military in September that year.[1][2]

In 1946, the Premier of Queensland, Ned Hanlon, offered the post of Governor of Queensland to Lieutenant General Sir Leslie Morshead, who declined. Hanlon then offered the post to Lavarack, who accepted and was sworn in on 1 October—the second Australian-born person to hold a governorship in Australia (Sir John Northcott was made Governor of New South Wales two months previously).[5] After completing his five-year term in 1951, Lavarack's governorship was extended by another five years to 1956. In February 1952, he proclaimed Queen Elizabeth II as the monarch in Queensland, following the death of her father King George VI. Lavarack's oath of allegiance and oath of office were then re-administered (at his request) to reflect the new monarch.[6] He was then reappointed for a further year from 1 October 1956, but due to ill health, Lavarack was only served four months of the extended term, and was relieved of his duties on 25 January 1957 by his lieutenant governor, although he officially remained governor until September 1957.

Lavarack retired to his home in Buderim on a pension of £1000 per annum. On 4 December 1957, he collapsed at the breakfast table and died. He was survived by his wife and three sons.[2][7] A state funeral was held on 5 December 1957.[8]